This document provides guidance on building a credit risk strategy. It discusses defining objectives and constraints, understanding what a risk strategy is, when to build one, the steps to build one including data analysis and segmentation, implementing the strategy, and measuring results. The overall goal is to introduce credit risk strategy building for those without experience. Key points include using data to segment the portfolio to meet objectives within constraints, implementing strategies through automated systems if possible, and defining measurements upfront to effectively assess strategy outcomes.
2. Objective & Constraints
Objective
An introduction to credit risk strategy building for the uninitiated
Constraints
Trade offs between – time & depth, understanding & complexity, brevity
& completeness
Exclusions
None intended but refer to objective !
3. What is Risk Strategy ?
Think of a game of Football –
Credit Policy is like the rules of the game e.g you can play only 11
players per team
Strategy is the way you use those 11 players, the positions you play them
Strategy aims to optimise achievement of objectives, generally within
the boundary of defined rules of credit policy
But a good thing is unlike football, credit policy rules can be modified as
an outcome of successful strategy, except for regulatory requirements
And the strategy can always be tested and modified based on previous
results, just like you may change players or their positions in next game,
hoping even better results
4. When to Build a Risk Strategy ?
You should build a credit risk strategy to run and manage your lending
portfolio if you have :
o An opportunity to exploit, or
o A problem to resolve
o Opportunities could be increasing revenue while managing risk – Limit
Increases, Cross-sell, Top-ups / Refinance
o Problems could be high losses, non usage – Limit decreases, straight flow
strategy, Inactive card strategy, cash limit reduction
5. Steps to Build a Risk Strategy
Define a clear objective that you want the strategy to achieve
For e.g Increase revenue through Credit Limit Increases [CLI] for cards
Define the constraints within which you want to build strategy
In CLI strategy it could be no increase in delinquency, only debit active
cards to be targeted
Define exclusions :
Policy or product related – staff cards, relationship based cards
Operational reasons – invalid phone numbers
6. Data Analysis
This is the heart of building a good strategy
Once objective, constraints and exclusions are defined and agreed
Segment the portfolio to meet the objective within the defined
constraints
Segmentation needs a Target variable which will form the base of
splitting / segmenting the portfolio
In CLI this could be bad rate like Ever 60+ is last 12 months
In case you have account level profitability, this can become a useful
indicator as well along with Bad rate
If you don't have good data you can do expert judgement strategy
7. Strategy Implemenatation
Strategy ideally needs to implemented on a system to run as
automated process
But off course multiple limitations like data availability in systems,
systems capability itself, process requirements, regulatory
requirements etc. may impact the complete automation efforts
Also system data or design limitations may directly impact strategy
design itself for eg if the system doesn't have Bureau data the same
mayn't be used in automated strategy and has to be used as a filter
outside the strategy implementation system, if atall
8. Results Measurement
Many a times the Achilles heel of a good strategy is the
measurement and quantification of the strategy outcomes
Define the measurement and strategy KPI's in strategy design phase
itself
This ensures the requirements for KPI measurement is known upfront and
efforts can be made to capture / maintain those details post
implementation
A general technique used is champion / challenger strategy assignment
with or without hold out groups to effectively measure the strategy
outcomes